Diamond has made seminal contributions to financial economics by applying concepts from contract theory under incomplete information in a rigorous way to several important problems in banking and finance. His very original paper on bank runs initiated, and remains the benchmark for, an entire literature in economics.

Research Interests

Douglas W. Diamond does theoretical research on financial intermediaries, financial crises, and liquidity His research agenda has been to explain what banks do, why they do it, and the consequences of these arrangements. Diamond's earliest research explained how the economic role of banks generated an essential link between the properties of their assets and the form of their liabilities; he showed how the bank's special assets (special because banks monitor special information about business borrowers) forced them to finance themselves with debt liabilities (deposits) rather than equity and also led banks to diversify across many loans. Research with Philip H. Dybvig demonstrated how banks specializing in creating liquid liabilities (deposits) to fund illiquid assets (such as business loans) may be unstable and give rise to bank runs and a need for deposit insurance. Diamond studied the role of short-term debt in corporate and bank capital structures. Research with Raghuram Rajan studied how banks can use the threat of bank runs to allow them to borrow more than the liquidation value of illiquid bank loans and examines the implications of this financial structure.

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